Domtar Corporation (UFS)

UFS 
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Domtar Corporation (UFS)

Q3 2009 Earnings Call

October 30, 2009 11:00 AM ET

Executives

Pascal Bossé - Vice-President, Communications and Investor Relations

John D. Williams - President and Chief Executive Officer

Daniel Buron - Senior Vice-President and Chief Financial Officer

Richard L. Thomas - Senior Vice-President, Sales and Marketing

Analysts

Mark Connelly - Sterne, Agee & Leach

Joe Stivaletti - Goldman Sachs

Chip Dillon - Credit Suisse

Michael Rosen - Bank of America/Merrill Lynch

Richard Skidmore - Goldman Sachs

Claudia Shank Hueston - JP Morgan

Christopher Chan - Deutsche Bank

Mark Wilde - Deutsche Bank

Stephen Atkinson - Bank of Montreal

Tarek Hamid - J.P. Morgan

Paul Quinn - RBC capital market

Robert Howard - Prospector Partners

Frank Duplak - Prudential

Presentation

Operator

Good day ladies and gentlemen, welcome to the Q3 2009 Domtar Corporation Earnings Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, today is Friday, October 30, 2009. I would now like to turn the meeting over to Pascal Bossé. Please go ahead.

Pascal Bossé

Great. Thank you, Marcus and good morning. Welcome to our third quarter 2009 earnings call. The speakers today will be John Williams, President and CEO and Daniel Buron, Chief Financial Officer. John and Daniel will begin their prepared remarks, after which will take questions. During the call references will be made to supporting slides in this time in this presentation in Investors section of our website.

As a reminder, all statements made during the call that are not based on historical facts are forward-looking statements that are subject to number of risks and uncertainties. I invite you to review Domtar's filings with the Securities Commissions for a listing of those.

And finally, certain non-U.S. GAAP financial measures will be presented and discussed. And you can find the reconciliation to the closest GAAP measures in the appendix of this morning's release, as well as on our website.

So, with no further adieu, I'll turn the call over to John.

John D. Williams

Thank you, Pascal and good morning to everyone. Despite of challenging first half in 2009, we've made solid progress in quarter three. Much stronger results compared to quarter two, coming from our better performance in our pulp and our paper businesses. In pulp, we have lower unit costs due to the restart of two of our market pulp mills as well as higher shipments on higher selling prices to paper grade pulps. We also had a solid performance on our core paper business, despite the continued lack-of-order downtime taking the balance of production to customer demand.

Speaking of demand, paper volumes increased slightly from the second quarter, while prices for business papers were flat overall. On commercial printing paper grades, selling prices were modestly lower compared to the second quarter average. The price increases announced at the end of the summer on offset and opaque grades have been successfully implemented. Also we announced price increases on other grades, including some of our converting products that we are in the process of implementing. We expect to benefit from these increases in quarter four and into 2010. Our production within balance with customer demand in the third quarter with inventory levels decreasing across all of our businesses. For paper downtime and machines slowdown amounted to 101,000 tons or about 10% of our quarterly capacity.

And this strategy allowed us to further reduce working capital exposure and generate cash. All this is quite an achievement in the context of the weak economy and the headwinds we faced in the past quarters from depressed pulp markets early in the year; weak paper demand and high to low lumber prices. As we work to improve our operating and performance and focus on debt reduction, our employees are executing well on the three Cs with continued efforts to enhance the value we offer our customers to improve our cost base and generate strong cash flow. Free cash flow was very strong in the quarter at $220 million, allowing us to further reduce our net debt level to approximately $1.6 billion.

The net debt to total cap ratio is now below 40%, standing at 38%. To summarize the third quarter before I turn the floor over to Daniel, for the in depth financial review, our operating and financial performance improved in all of our business this quarter. Losses in pulp have been dramatically reduced, sales volumes in paper improved 5% due to a combination of better demand and slightly higher export volumes. We have lower costs due to better operating performance and our efforts from procurement costs and discretionary spending. And finally, free cash flow was very strong.

With that I'll turn the call over to Daniel, and I'll come back to share our priorities and outlook. Daniel?

Daniel Buron

Thank you, John and good morning everyone. Let's start with the highlights on slide four. Domtar reported today net earnings of $4.24 per share of the third quarter compared to net earnings of $1.12 per share in the second quarter and net earnings of $1 per share in the third quarter of last year.

Our earnings were $1.32 per share in the third quarter compared to a loss of $0.76 per share in the second quarter. Cash flow provided from operating activity amounted $244 million and capital expenditures amounted to $24 million. Therefore, free cash flow amounted $220 million this quarter. Turning to the sequential variation in the earning on slide five; sales were $121 million higher than the second quarter, mostly due to higher volumes in paper and pulp as well as higher pulp prices. Other operating income amounted to $159 million in the quarter, mostly due to the $159 million refundable despite tax credit for the production and use of our alternative bio-fuel earned in the quarter.

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